Why the EU Should Break Up

February 14, 2012

Politicians in France and Germany must recognize that the European Union as it stands now cannot last and will only entail further damage later on. They must instead opt to create a smaller, better organized association, says Desmond Lachman, a resident fellow at the American Enterprise Institute.

However, recent actions suggest that the leaders of these two countries will attempt to salvage what's left of the EU instead of cutting their losses. At a recent economic summit, it was discussed that leaders of nations with high debt levels and unsustainable deficits should accept balanced budget amendments and cut back on their public sector expenditures.

In the case of Italy, it will undertake a budget adjustment of close to 2 percentage points of gross domestic product (GDP) per year in each of the next two years.

For Greece, Ireland, Portugal and Spain, the pain will be much greater with the proposed budget adjustment at around 3 percentage points of GDP per year in 2012 and 2013.

These are the measures of austerity whereby these troubled nations will prove their worth to the EU and attempt to fight for its continued survival. However, current economic trends, combined with the unique monetary situation of EU members, make a return to debt sustainability unlikely in the near future.

Firstly, the austerity measures described above are so substantial that they would be enormously difficult to bear in any context.

Furthermore, state revenues from taxation are already depressed by the economic downturn and subsequent European credit crisis, such that additional austerity measures threaten to break already-fragile state finances.

Finally, EU members must face the additional debacle created by their participation in a currency union that denies them control over monetary policy -- this eliminates the option to ease the pain of austerity via devaluation and stimulus to exports.

Given these obstacles, it is unlikely that austerity measures will return these troubles nations to financial solvency. Therefore, the EU in its current form is almost certainly unsalvageable and the governments of France and Germany should give thought to their plans beyond the EU's recovery.